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What Is Planned Giving? We List All The Basics

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Published: Nov 24, 2023

Planned giving is a highly beneficial fundraising option for nonprofits. However, it can also be challenging to understand, legally complex, and require consultation with several experts such as financial advisors, lawyers, and more. 

However, turning away from planned giving for these reasons is a huge loss of opportunity for nonprofit organizations.

This article aims to simplify planned giving, explain commonly used terms, and explore how your nonprofit can begin a planned giving program.

What is planned giving?

Planned giving is the process of assigning donations in the present to be given at a future date. For a more precise planned giving definition, planned giving is the process of donating a pre-planned gift either during the donor’s lifetime at a later date or once the donor has passed.

 

Planned giving helps donors who want to manage their taxes, leave behind a legacy, or contribute a major gift that they otherwise wouldn’t have been able to make. 

To understand planned giving in its entirety, it is essential to understand a few common associated terms. The table below explores these terms.

Read Also: 6 Easy Steps to Craft the Perfect Major Donor Cultivation Plan 

Common terms in planned giving

Terms

Definition

Beneficiary An organization designated to accept funds from a will or a trust. 
Bequest A bequest is a gift from an estate. It could be property, cash, or other assets as stipulated in the will. A bequest specifies an amount to donate or allots a percentage of the sum from an estate, cash amount, or leftover funds after making other payments. 
Blended gift It is a combination of an outright cash or in-kind donation with a bequest. 
Deferred It is a gift to be given at a later date. It is used interchangeably with planned gifts. 
Donor Advised Fund It is a fund owned and operated by nonprofit organizations, also known as sponsoring organizations. Donors to this fund have a say in how these funds are utilized.
Endowment Endowments are a unique form of planned gifts. A large amount (principal amount) is invested, generating a constant income source. $25,000 is usually the minimum amount invested. 
Non-cash Assets A non-cash asset can be any item with appreciating value. It could be real estate, an insurance policy, cryptocurrency, mutual funds, etc. 
Real Property Real estate donation is also known as real property donation. It is an immovable asset such as land or permanent property. 
Trust A trust is a legal agreement that allows a third party, such as a bank or financial advisor, to hold assets on behalf of the beneficiary. 

There are three types of trusts:

  1. Revocable trust: A trust whose terms and conditions can be changed or revoked by the donor throughout their lifetime.
  2. Irrevocable trust: The donor cannot modify this trust’s terms and conditions. Donors to this trust receive a tax break.
  3. Charitable remainder trust: These trusts generate an income for the donor during their lifetime. Sometimes, it can also extend to the lifetime of their spouse, children, or another chosen individual post, which turns into a gift for the charity.

Now that you are familiar with the planned giving definition and other common terms associated with planned gifts, let’s look at different types of planned giving.

Types of planned giving 

 

There are three primary types of planned gifts: 

  1. Outright gifts in cash or kind.
  2. Gifts that generate income or provide other financial benefits to the donor.
  3. Gifts that are transferred upon the donor’s death.

Various planned gift options fall into one or more of the above categories. They are:

1. Outright gifts for planned giving

  • Bequests

A bequest is an official statement in a will, trust, or estate plan that allot a specific gift to a charity named in the statement.

Bequests are a popular form of planned giving, and they alone  have generated  $46 billion for nonprofits between 2019 and 2021.

There are three ways in which a bequest can be carried out:

  1. A specific amount of money is assigned to the charity.
  2. A percentage amount is given to the charity. For example, a percentage of a property’s value at the time of giving.
  3. A remainder amount is the remaining funds after all other bequests are paid.
  • Appreciated Securities

Appreciated securities are common stock in companies or mutual fund investments. The idea is that these investments have ‘capital gains’; that is, they gain value over a period of time. The amount invested today will yield higher returns in the future.

While capital gains are usually taxed, donating them to charity leads to a tax deduction, making it a lucrative planned gift option for donors.

  • Life Insurance

Donors can choose to assign a charity as the beneficiary of their life insurance policy. 

Donors can also choose to have multiple beneficiaries for their life insurance-planned gift. When the time comes, the amount will be split between them, benefiting both loved ones and a charity they select.

This is an excellent option if a donor wants to make a major gift without affecting their cash flow.

  • Real Estate

Real estate planned gifts include residential properties, farmland, underdeveloped plots, or commercial property. 

A gift of real estate can secure a significant tax deduction for the donor based on fair market value. They will also avoid any capital gains tax.

  • Personal Property

Personal property could include artwork, collectibles, expensive machinery, and other personal, tangible property.

This planned gift is an excellent way to contribute a significant item while avoiding any insurance or costs to maintain the object. Nonprofits can then display the item for a fee, donate it to someone in need, or sell it in a charity auction for a profit.

  • Retirement Plan

Individuals over 70.5 years of age can donate up to $100,000 from their IRA to a charity for a tax deduction as part of qualified charitable distribution

Apart from this, individuals can donate their IRA, 401(k), and other retirement assets to charity so their heirs can avoid paying any tax on that amount.

 2. Income-generating planned gifts

  • Charitable Gift Annuity

A Charitable Gift Annuity (CGA) is a contract between a charity and a donor. The donor makes a sizeable contribution to the charity in return for a partial deduction to their tax. In addition, they also receive a steady income from the charity for the rest of their lives. 

  • Pooled Income Fund

A pooled income fund is a planned giving option that allows donors to make a tax-deductible contribution to a nonprofit and provide steady income to one or more beneficiaries.  

In a pooled income fund, donations from multiple donors are pooled together, and the interest earned is distributed amongst beneficiaries. When a beneficiary passes, their share of returns is transferred to the charity.

Read Also: Use These 52 Nonprofit Fundraising Ideas to Raise More Funds This Year 

  • Charitable Remainder Annuity Trust

A charitable remainder annuity trust (CRAT) is a large cash donation or the donation of appreciated property to a charity. In return, the donor or another beneficiary of their choice receives a fixed annual income for a duration (maximum 20 years) or the remainder of their life.

The amount received from the sale of the appreciated assets is not taxed immediately. Instead, the payout is split into fixed annual payouts for the beneficiary. The value paid could vary from a minimum of 5% to a maximum of 50% of the total value of the appreciated asset.

  • Remainder Unitrust

A remainder unitrust, like CRATS mentioned above, is a corpus of funds or assets donated to a charity. However, unlike charitable remainder annuity trusts, unitrust payout returns are revalued annually; therefore, the payment differs yearly.

3. Planned gifts that protect assets

  • Lead Trust

A lead trust provides an annual fixed payment to a selected charity or charities of the donor’s preference for a duration of time. Once the trust term ends, the corpus amount returns to the donor or other beneficiaries.

It operates in the exact opposite manner of a charitable remainder trust.

  • Retained Life Estate

Retained life estate planned giving is when a donor donates their property to a charity but retains the right to live in it, rent it out, and use it at will for a fixed number of years or the donor’s lifetime.

In exchange, the donor receives an immediate tax deduction on the property’s fair market value minus its present value.

  • Bargain Sale

A bargain sale happens when a donor decides to sell goods or services to a charitable organization for less than the fair market value of the goods and services.

The difference between the sale price and the item’s fair market value is considered the planned gift. 

Read Also: 6 Tips For Creating The Perfect Donor Stewardship Plan 

Legacy vs. planned giving

Planned giving and legacy giving are used interchangeably. But are they the same?

Here’s what each term actually means:

  • Planned giving: When a donation is planned in the present to be made later.
  • Legacy giving: Charitable donation made after the donor has passed away.

Legacy gifts are often included in a planned giving program to ensure the charitable donation is passed on without any delay or cost of the probate process.

Many nonprofits, however, use the terms planned giving and legacy gifts interchangeably. This practice is popular because the idea of leaving behind a legacy is more appealing to donors and encourages planned giving.

Read Also: 7 Donation Incentives That Can Help You Raise More Funds 

Planned Giving assets

Planned Giving assets are cash funds or other valuable items you can consider gifting to a charitable organization.

Here are different planned giving assets donors can consider:

  1. Non-probate transfer vehicles
  2. Non-cash asset
  3. Real property

Non-probate transfer vehicles

Non-probate transfer vehicles are planned gifts that allow the transfer of the gift without needing a probate process. A probate process is a process of proving the will in court. Instead, these gifts are directly transferred to the nonprofit once the donor passes.

The deeds, transferred at the donor’s death, can include cash, real estate, savings accounts, and checking accounts.

Read Also: Beyond the Ask: 5 Strategies for Engaging Major Donors 

Non-cash asset

As the name suggests, non-cash assets include any planned gift not in cash. These could include real estate, life insurance policies, and retirement accounts.

Real property

Real property can include any real estate, such as residential property, investment property, farmland, corporate buildings, etc. 

Donors can donate this property in their planned giving, access rights, or ownership.

Are there tax benefits to planned giving?

Planned giving comes with its share of tax benefits. They include:

  • Donation of appreciated properties such as real estate or securities to receive a tax deduction on the full market value of the asset and pay no capital gains tax.
  • Donors who opt for a life-income gift receive a tax deduction on the asset’s full market value minus the present value of the income retained. If they fund their planned gift with an appreciating asset, they do not have to pay capital gains tax.
  • Gifts that are transferred upon the donor’s death such as bequests or beneficiary designation in a life insurance policy or other assets, do not receive a lifetime income tax deduction for the donor. Instead, the donor is not levied estate tax.

Read also: The ABCs of Political Donations: Tax, Tracking, and Limits

Now that you know the basics of planned giving, let’s explore how to begin your planned giving program.

How to start a planned giving program

A planned giving program can be a complex legal process. However, when your nonprofit is at a stage where you can plan one, always remember that planned giving is about helping donors leave behind a legacy, make a difference, and contribute significantly to a cause they believe in.

It is a long-term fundraising strategy which requires long-term engagement with donors.

Read Also: Your First Guide to Start Gift Programs for Grassroots Fundraising 

To begin a planned giving program, here are steps you can take:

  • Get your board members “on board” your planned giving strategy. Understand their point of view to understand the objectives of your program best.
  • Form a planned giving committee of experts. Since it is a legal and financial process, you will need lawyers, financial advisors, a board member with your best interests at heart, a business owner who understands tax breaks and estate planning, and other such individuals to guide you. 
  • Establish a legacy society. People quickly associate with a brand and its meaning. Establishing a society under which you operate your planned giving program will create great brand recall. You can put together a good logo, brochures, and more.
  • Establish policies for planned giving. Every nonprofit may or may not accept all forms of planned gifts. Their terms and conditions for acceptance also vary. Determine policies along with your committee members.
  • Market your planned giving program: Get the word out there for donors to know you accept planned giving. Add it to your website, announce it on social media, share brochures or let everyone know at events you organize. 
  • Develop a prospect research strategy. Understand the donors that are more likely to donate to a planned giving program and plan your outreach to them. Research donor prospects and use donor prospect research tools to reach them. You can also have internal metrics like donor recognition levels to identify prospective donors.
  • Develop a consistent engagement strategy. Contact donors via phone calls, text messages, direct mail, and more to keep them engaged. Planned giving is about long-term engagement with donors. Never forget to plan a way to thank donors who intend to give a gift to your organization.

Read Also: The 5 Biggest Mistakes That Hamper Donor Relations 

Get started with your planned giving program

Planned giving is a large undertaking for a nonprofit organization, but its benefits, too, are huge. While major gifts fundraising is a quicker way to generate large income, planned giving encourages donors who would not otherwise be able to contribute significantly to your charity.

Begin the process of legacy giving today. If you need help planning your strategy, use our nonprofit fundraising template as a step-by-step guide and checklist.

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